China Online Search vs. MMO Game Market

The 2007 China Massively Multiplayer Online [MMO] game market size is about four (4) times as big as the China online search market. The 2007 China online search market is about $0.4 billion in size, of which Baidu (BIDU) has about 61% market share, Google (GOOG) has about 24%, and Yahoo! (YHOO) has about 10%. The 2007 China MMO game market is about $1.6 billion, of which Shanda Interactive Entertainment (SNDA), Netease (NTES), Giant Interactive Group (GA) and The9 Limited (NCTY) collectively have about 61% of market share.

The China MMO game market is growing at an annual rate of about 35% or more. For the China online search market to catch up with the MMO game market in size by the end of 2010, it would have to grow at annual rate of 110% to $4B (25% of Google's 2007 total estimated revenues for the whole world). The analysts-average 2008 revenue estimate for Baidu is only 83% more than for 2007. At that rate, it would take China online search 4 1/2 years to catch up with the China MMO game market in 2012, at a market size of $6 billion.

For the $380 per share spent on BIDU, one could buy 2 shares of SNDA, plus 4 shares of NTES, plus 7 shares of GA, plus 4 shares of NCTY. That would capture 61% of market share like Baidu, with four (4) times as much revenue today, and one times as much revenue in 2012. At roughly the same average net margin rate as Baidu's 35%, that would imply a whole lot more earnings sooner then later.

Sources:

1. Bloomberg.com "China Can't Spell G-O-O-G-L-E as Search Engine Falters as Verb", December 11, 2007.

2. Chinavestor.com "Chinese interactive game developers in the stock market:Market Share of Online Game Developers (Q1, 2007)", November 06, 2007.

3. Yahoo! Finance Analyst Estimates.

Disclosure: Author has a long position in some of the above-mentioned securities